See Also

Origin Energy is shaping up as the most likely partner for Arrow Energy in Queensland after Origin chief executive Grant King said the two are in talks about a potential expansion of Origin’s $24.7 billion Australia Pacific LNG venture.

Mr King told Financial Review Sunday that he could offer Arrow, owned by Royal Dutch Shell and PetroChina, “a great site with plenty of potential to expand.”

Shell signalled last month it was looking at merger options for Arrow with one of the other coal seam gas-based LNG ventures under construction in Queensland, alongside the original plan to build a stand-alone LNG plant on Curtis Island.

Building a fourth LNG plant alongside the three already under construction on the island in Gladstone harbour has been looking increasingly unlikely amid rising construction costs and increasingly burdensome environmental regulations. The three projects have already suffered combined cost overruns beyond their original budgets of about $9 billion.

Analysts believe that some consolidation between APLNG and Arrow LNG makes economic sense given the cost benefits of expanding an existing plant, rather than building a new plant from scratch. The transaction could involve Shell and PetroChina building an LNG production plant on the APLNG site, or processing their gas through APLNG facilities.

“From an internal rate of return perspective, which is what we look at for these projects, it improves dramatically with a third train,” Mr Steed said.

“You’ve got all the civil works in sight, you’ve got environmental approvals, you’ve got a pipe that can carry a third train. Your fixed cost recovery is dramatically better.”

Arrow talks not exclusive

Mr King signalled the talks with Arrow are not exclusive, however.

“I’m sure each of the projects, including APLNG, will say to Arrow, here’s what we can offer you,” he said.

Mr King’s comments come as respected consultancy McKinsey said Australia needed to cut the cost of new LNG projects by up to 30 per cent to be competitive with overseas rivals.

Australia’s LNG industry is already on track to be worth $520 billion, but a further $320 billion of value in potential additional projects are hanging in the balance awaiting approval.

Mr King said Australia needs to be careful to make the most of the boom in LNG construction, which should see the country’s production capacity almost quadruple to about 80 million tonnes a year by 2017.

“Not surprisingly, many in business, and I would certainly say, we must be mindful that we need to keep building this country and that means keep investing in infrastructure and social infrastructure, not just physical infrastructure,” Mr King said.